What's Frightening About California's Pension Numbers

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Scratching your head as you read competing claims about just how short the state is in the money needed to fund its current pension obligations? Don't feel bad. The experts in this area are scratching their heads too. Which is what's so scary.

A recent study from researchers at Stanford estimated the unfunded liability for the state's three biggest pension funds -- Calpers (for public employees), Calstrs, and the University of California Retirement System -- at a whopping $500 billion. That's more than five times the amount of the state's annual general fund budget. The pension funds and other critics have disputed that estimate, issuing their own competing numbers that put the problem at anywhere between $55 billion and $100 billion.

Why the discrepancy? Because the estimates are based on wildly different views of how well the pension funds will do in the markets. The Stanford researchers took an extremely conservative estimate -- the "risk-free" 4 percent returns that the pension funds could get by investing in 10-year Treasury bonds. The funds project annual returns of 7.5 and 8 percent, based on what they say are conservative estimates for the performance of their diverse investment portfolios. This uncertainty -- and the wide range of projections -- are in some ways more frightening than the size of the numbers.

Though those numbers should give us worry. Even the lowest figure -- the $55 billion, which is based on the estimates of the funds themselves -- would create a crisis. That number is nearly three times the size of the deep annual budget deficits that have produced such deep cuts in education, health and other programs. And since taxpayers are legally obligated to cover any shortfall between what the pension funds earn and what public employees are promised, every dollar devoted to pension payments is a dollar cut from government services -- or a dollar in increased taxes.

Instead of arguing about the numbers, pension experts and political leaders should be taking action today to limit the growth of these obligations.